A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the extended Du Pont equation. The firm has no lease payments, but has a $3 million sinking fund payment on its debt. The most recent industry average ratios and the firm's financial statements are as follows:
|
Industry Average Ratios |
|
|
| Current ratio |
3.95x |
|
Fixed assets turnover |
4.69x |
| Debt/total assets |
32.40% |
|
Total assets turnover |
2.29x |
| Times interest earned |
18.09x |
|
Profit margin on sales |
4.31% |
| EBITDA coverage |
15.15x |
|
Return on total assets |
9.88% |
| Inventory turnover |
10.96x |
|
Return on common equity |
14.61% |
| Days sales outstandinga |
35days |
|
|
|
aCalculation is based on a 365-day year.
| Balance Sheet as of December 31, 2012 (Millions of Dollars) |
|
| Cash and equivalents |
$97 |
|
Accounts payable |
$68 |
| Net receivables |
68 |
|
Notes payable |
51 |
| Inventories |
182 |
|
Other current liabilities |
11 |
| Total current assets |
$347 |
|
Total current liabilities |
$130 |
|
|
|
Long-term debt |
29 |
|
|
|
Total liabilities |
$159 |
| Gross fixed assets |
302 |
|
Common stock |
154 |
| Less depreciation |
79 |
|
Retained earnings |
257 |
| Net fixed assets |
$223 |
|
Total stockholders' equity |
$411 |
| Total assets |
$570 |
|
Total liabilities and equity |
$570 |
| Income Statement for Year Ended December 31, 2012 (Millions of Dollars) |
|
| Net sales |
$950.0 |
|
| Cost of goods sold |
731.5 |
|
| Gross profit |
$218.5 |
|
| Selling expenses |
104.5 |
|
| EBITDA |
$114.0 |
|
| Depreciation expense |
16.2 |
|
| Earnings before interest and taxes (EBIT) |
$97.8 |
|
| Interest expense |
4.0 |
|
| Earnings before taxes (EBT) |
$93.8 |
|
| Taxes (40%) |
37.5 |
|
| Net income |
$56.3 |
|
- Calculate those ratios that you think would be useful in this analysis. Do not round intermediate steps. Round your answers to two decimal places.
|
Firm |
Industry Average |
| Current ratio |
x |
3.95x |
| Debt to total assets |
% |
32.40% |
| Times interest earned |
x |
18.09x |
| EBITDA coverage |
x |
15.15x |
| Inventory turnover |
x |
10.96x |
| DSO |
days |
35days |
| F.A. turnover |
x |
4.69x |
| T.A. turnover |
x |
2.29x |
| Profit margin |
% |
4.31% |
| Return on total assets |
% |
9.88% |
| Return on common equity |
% |
14.61% |
- Construct an extended Du Pont equation, and compare the company's ratios to the industry average ratios. Do not round intermediate steps. Round your answers to two decimal places.
|
Firm |
Industry |
| Profit margin |
% |
4.31% |
| Total assets turnover |
x |
2.29x |
| Equity multiplier |
|
|